3.3.2 Costs Flashcards
What is a fixed cost?
One which does not change directly with output
Examples of fixed costs
- rent
- insurance rates
- salaried staff
Fixed costs for businesses
- they do not vary directly with level of output = treated independent of level of production
- must be payed whether or not the firm produces nothing or operates at full capacity
How to calculate average fixed costs (ATC)?
total fixed cost/ output
What are variable costs?
One which does change directly with output
Examples of variable costs
- raw materials
- hours paid/ zero hours workers
How to calculate total costs?
Fixed costs (TFC) + variable costs (TVC)
How to calculate average cost?
TC/output
How to calculate Average fixed cost?
TFC/output
How to calculate average variable cost?
TVC/output
What will happen to AFC as output increases?
It will decrease
What is the economic theory?
- in the short run, at least one factor input is fixed, some costs will also be fixed
- in the long run, as all factor inputs are variable, so all costs are variable
What is marginal cost?
The cost of producing an additional unit of output
How to calculate marginal costs?
Change in total cost/ change in output
What is the law of diminishing returns?
Derivation of short run cost curves from the assumption of diminishing marginal productivity
What is diminishing marginal productivity?
- as more of a variable factor (e.g. labour) is added to fixed factors (e.g. capital), there will initially be an increase in productivity
- HOWEVER a point will be reached where additional units begin to decrease productivity
Impact of diminishing marginal productivity on marginal costs?
- marginal costs increase when DMP occurs
- e.g. increase in labour = diminishing return as each additional worker is adding less to total output
- MC assumes all workers are paid the same = increase in MC
What is marginal physical product?
The amount of units an extra worker produces
How is marginal physical product calculated?
Difference in total output by each additional worker
R/ship between law of diminishing returns and short run?
- short run = at least on factor of production is fixed
- MPP + diminishing marginal productivity only occurs in the short run
- as more labour is added to a fixed amount of capital or land, it is inevitable that output from an additional worker will fall at some point
